Would Consumers (Really) Spend More For Better Service?

Lately, there has been a fair amount of productive dialogue as to whether service and experience are the same thing, i.e. a rose by any other name. It’s pretty well understood that service is a component of overall experiential value delivery. Sometimes it is differentiating, and offers consumers definite benefits – such as practiced by companies like Zappos, Wegmans, Ritz Carlton, Rackspace, Southwest Airlines, Trader Joe’s, Amazon, Baptist Health Care, and Zane’s Cycles – and sometimes it is just one of multiple factors which contribute to customer loyalty or disloyalty behavior. Bob Thompson chronicled a part of this very well in a recent, widely-read, blog, where he looked at customer experience vs. customer engagement. http://customerthink.com/customer-experience-vs-customer-engagement-a-distinction-without-a-difference/

Customer service and support is, then, an element of both engagement and experience; but, it is often used as a surrogate term, to be inserted in place of either engagement or experience.

Recently, we’ve seen a public example of performance results from concentrating principally on service enhancement and relabeling, or mislabeling, it as ‘customer experience’, while somewhat neglecting product: http://customerthink.com/casualties-of-highly-competitive-commoditized-services-marketing-lets-start-with-sprints-framily/ The tacit belief at Sprint was that service, largely on its own, would drive customer behavior.

All of that said, there’s little argument that customer service, especially when practiced from a proactive and emotionally-driven base, has economic value and should be seen as a contributor to enterprise profitability rather than merely a passive, reactive, even grudging cost of doing business. As a support for this proposition, It is also often hypothesized that consumers would spend more with companies providing better service. In this post, we’ll look at whether, and to what degree, this is true, false, or somewhere in between.

For several years, up through its purchase by Oracle in 2012, RightNow Technologies commissioned a study (conducted by Harris Interactive), where they stated that great customer service (which they labeled as experience) influences downstream purchasing decisions – at least in online retail. A key finding was that half of these consumers indicated that they would buy from an online retailer if they had great customer service or a previous positive experience. After this positive result, 31% of consumers said they purchased more from the retailer. Overall, RightNow found that 86% of consumers would spend more for a better customer experience (CEI Report, 2011, RightNow)

Oracle released a research report in 2012 – “Why Customer Satisfaction Is No Longer Good Enough” – in which it was revealed that 81% of consumers would be willing to pay more for a superior customer service experience, with nearly half (44%) willing to pay a premium of more than 5% (Oracle Press Release, December 2012).

More specific, so that the reader doesn’t have to parse whether the study is addressing customer service or customer experience, was the American Express Global Customer Service Barometer, a 2011 survey covering the U.S. and nine other countries. The study explored attitudes and preferences toward customer service. Among key findings, the study identified that 70% of Americans are willing to spend an average of 13% more with companies they felt provided excellent customer service. This was significantly higher than corresponding 2010 results (58% of Americans would spend 9% more). Note: The flip side is that two-thirds of consumers said companies aren’t paying enough attention to service: 42% said companies don’t do anything extra to keep their business, and 22% thought that, through passive service, companies take their business for granted.

Back to spending more for service. The American Express study found that the willingness to spend more for superior service wasn’t confined to the U.S. The average amount of additional spend ranged from 7% to 22%:

Looks compelling, doesn’t it? Well, though it seems like improved service could represent a major business opportunity, this is one of those instances where there is a big difference between what customers say and what customers actually do.

Before companies begin investing in improved customer service so they can raise prices, they need, for example, to know exactly what processes to upgrade, and to what degree. This requires application of research techniques like threshold analysis so they can determine which, of multiple alternatives – more service staff, cut waiting time, enhanced self-service, use of service support communities, improve first contact resolution, enhance customer interaction capabilities, proactive complaint generation and handling, etc. – to improve.

Even, however, if companies know how much, and where, to spend on service improvement, they have to be fully assured that customers would see the difference and be willing to reward them, financially, for it. Beyond the resources expended for enhanced service, they need to create brand image recognition that this company now provides service that is so superior to competitors that there would be real willingness for customers to spend more. That’s a very tall requirement, in the scaling Mt. Everest category.

Sometimes, like Sprint, companies will invest in improved customer service, but not manage the value of the overall experience well enough, and customers will still defect. More often, even if targeted research and pilot testing more accurately reflects customer spending behavior, there isn’t much (or not enough) concrete data to motivate businesses to spend on better service, such that they would reap the rewards of increased customer dollars – so, they don’t.

Michael Lowenstein, PhD CMC CCXP, is Thought Leadership Principal and Director, Qualitative Services for Beyond Philosophy (beyondphilosophy.com), an international customer-centricity and customer experience consultancy based in the U.S., He specializes in customer life cycle management, strategic/profitable customer relationships, customer and employee experience research/strategy, and employee ambassadorship behavior research, consulting, and training; and he has authored seven stakeholder-centric strategy books and 300+ articles and blogs.In 2018, named to CustomerThink Hall of Fame.

For years I’ve been seeing studies that show consumers *say* they are willing to spend more for better customer service/experience.

What I haven’t seen is evidence that consumers actually *do* spend more money for better CX. Have you?

My take is that the revenue impact of CX improvements is overblown. Yes, it’s an important part of the loyalty equation. For some types of businesses (e.g. retail) CX may be the primary loyalty driver.

But my sense is that what consumers say they will do (pay more for better service) doesn’t match reality. I think there is a segment of consumers that value good service and will pay more. Another segment (a bigger one, in my opinion) that will use good service as a differentiator, all other things being equal. In other words, if the product and price are about the same as other alternatives, better service tilts their decision. That’s a revenue impact, but the consumers are not paying more.

In general, I don’t think that excellent CX will make up for an inferior product and/or uncompetitive pricing, except for a small segment of customers.

As you know, I’m an outspoken advocate for CX excellence. But I fear that hyping CX as the cure for bad business performance will lead more companies down the road that Sprint took. Improving customer service helped stabilize their business and improve CSAT. But an inferior product still leaves the company struggling.

Don’t quite agree. This issue is more complex than simple regression will reveal. It’s very often a case of where causation doesn’t mesh with correlation. An example is when former customers identify service costs as a reason for defection, a ‘red herring’ for the actual reasons. Organizations will be far better served by finding true drivers of response to all elements of service, including price, utilizing threshold analysis and/or swing voter (discriminant function) analysis.

First, to clarify because of the order of reader comments, when I said I didn’t agree it was a response to Charlie’s comment. I do largely agree with Bob’s comment. Where improvements are initiated in the service aspects of experience, they are more often to help make this group more efficient, productive, and technologically current. Sometimes, service investments are in training, to help make CSRs better listeners and more adept at building a relationship with the customer.

Right, and just to be clear, my issue is with the claim that customer service will boost margins. When customers say they will spend more, I think that’s true if CX is a loyalty driver and thus consumers return to buy again, or increase the amount of purchases.

As you said it well, service is an important differentiator and can help in supplier selection. That will have an overall positive effect on revenue, even if customers don’t pay a “premium” for doing business with a CX leader.

Years ago, Reichheld suggested that the “loyalty effect” includes getting a premium price. That notion makes some intuitive sense, but when I examine my own behavior I don’t find I’m willing to pay more. Actually, if I’m very loyal I expect to pay less!

Consultant David Pinder said it pretty well: “What matters now, what governs choices now, is customer value.” If companies really think they can exact a higher price for better service (and have proven this to themselves with actual pilot test results), then they have my blessing. It’s extremely risky, though, as organizations sneaking new, higher service fees have learned through public customer backlash. Remember Bank of America’s surprise $5 monthly debit card fee announcement in 2011, when over 20,000 of their customers pledged to close their accounts unless the fee was removed – and it was!! How long did it take BofA to recover customer trust from that gaffe?

I have seen studies, including the American Express 2014 Global Customer Service Barometer, that show a large percentage of customers state they are willing to pay more for better service, and have come to similar numbers in my own studies. But like I say in presentations when I show these numbers, that doesn’t mean companies should start charging more for good service: it just means there is demand in the market for better service. And all things equal, those who provide better service will see greater returns from repeat purchases or higher spend. People may be willing to pay more for good service, but they have to experience it first.

To give nuance to Mike’s article and Bob’s comments, here are other numbers from the same American Express 2014 Global Customer Service Barometer that show the percentage of customers stating they are willing to pay more for good service is very close to the percentage of those who *have spent more*. In the following list by country, the first number is respondents “Willing to pay more for excellent service”, second is those who have “spent more with a company because of a history of good service experiences”.

The paper notes that “With the exception of Japan (35%), six-in-ten consumers or more have spent more with a company because of a history of positive customer service experiences.”. On a side note I would add that the service quality expectations and delivery levels in Japan are very high in general, which might account for the low numbers – good service is the norm, so Japanese don’t really think of paying more for it.

This is terrific content and insight, reinforcing both Bob’s and my perspectives on service contribution to the overall experience, and resulting impact on downstream customer behavior. Thank you for sharing.

I would just add that correlation (and causality) are asymmetrical in respect of perceived deviation from a neutral ‘baseline’ experience.

To put it simply: increased spend and wallet share are less convincingly related to good service, experience or satisfaction. BUT – decreased spend and churn are far more robustly related to bad service and experience.

Vladimir – Thanks for your comments. Agree that service is often an element of experience where reduction, or elimination, of delivery dissatisfiers, i.e. the ‘hygiene’ or ‘get the basics right’ approach, is more effective and financially viable than endeavoring to delight customers.. Kano, I think, would applaud service hygiene initiatives.

Vladimir – I’m curious about your comment about increase spend being less convincingly related to good service or experience. The article indicates the American Express study finding the opposite. I may be misunderstanding here which is why I’m asking. I can see your point on hygiene efforts although along the way, the company should have some sights on how it can create the delight without breaking the bank. Sometimes, the delight factor came come out of hygiene efforts.

Rick – when I said ‘less convincingly related’, i meant the ‘uplift’ in spend attributed to satisfaction is smaller than the negative impact of dissatisfaction. Hence my emphasis on addressing root causes of dissatisfaction first:

(a) For comparable investment removing dissatisfaction adds more to the bottom line, and
(b) If it i snot fixed and you embark on ‘delighting’ the latter will be eroded by the negative experiences and much of that effort (and investment) will be wasted.

Plus, in today’s world full of customer experience horror stories and how-not-to-do-it case studies, just ‘doing what it says on the tin’ (keeping promises, i.e. hygiene) – is already a delight 🙂

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